Having ruled out Capital Gains Tax and Wealth Tax, the incoming Labour government must be looking for some significant progressive policies that they haven’t already ruled out. Expanding the ACC scheme fits that brief, and the Green Party have conveniently already proposed doing so. But, how to fund it?
The accident/illness distinction
The accident/illness distinction, under which the scheme primarily covers injuries caused by accident, and illnesses are only included in the scheme on exceptional grounds, has been a feature of the scheme since its inception. Professor Geoff McLay has called it the scheme’s “original sin”. The authors of the Royal Commission Report that recommended no-fault scheme for injury said that “in logic there is no answer” to the exclusion of illness.
So, why was illness excluded in the first place, and why is it still excluded?
There are a few different reasons for the ongoing exclusion of illness.
The first reason is a practical one. The Royal Commission also suggested that, practically speaking, “two considered steps” (ie an accident compensation scheme which was expanded to illness at a later date) might be pragmatically wiser to “one massive leap”. The Royal Commission focused on injury, and the boundaries of the scheme roughly correspond with the sorts of things for which you used to be able to sue people or get workers compensation.
The second reason is a political one. It’s true that logic does not provide a basis for the exclusion of illness, but logic is not the basis for the argument for inclusion of illness either. It’s a political/moral argument, not a logical one. For some people, it’s practically self-evident that the community has a moral obligation to take care of the less fortunate, and that there is no basis for distinguishing between injury and illness. That view is broadly associated with the political left.
But, it is possible to distinguish accident from illness on the basis that, generally speaking, while we can often say that someone is responsible for an accident because they created the conditions that resulted in a risk occurring and causing injury, that is not the case for illness. Someone being born with a disability can be seen as just something that happens. It’s not normally something that society has held other people responsible for. As a former editor for the New Zealand Law Journal once put it in the July 1991 issue:
Nobody of course has ever been able at law to sue Nature or some such entity for appendicitis or arthritis or any of the other multitudinous ailments that the flesh is heir to.
On this view, the ACC scheme responds to the sorts of injuries that people could have been held responsible for causing. So, the entitlements are generous and reflect people’s actual losses because they’re replacing a system that allowed people to sue for full compensation if they could identify someone that unlawfullly caused their injury. Part of the justification of requiring people to pay levies is that they get protection from being sued. On the other hand, illness conditions are dealt with as a matter of social welfare, where benefits are paid aimed at meeting basic needs rather than compensating for actual losses.
That’s why ACC version 0.5 under the original Accident Compensation Act 1972, enacted under a National government, only provided cover for earners’ and motor vehicle injuries. Before that Act came into force, Labour came into power and extended the scheme to cover all accidental injuries, giving us ACC version 1.0.
The third reason behind the ongoing exclusion of illness is a financial one. It would be expensive to expand ACC to illness and to provide insurance-based entitlements – ones that reflect actual losses, like lost earnings – to people suffering illness. That’s not a reason not to do it, but it’s a reason that it hasn’t happened.
Talk, on the other hand, is cheap. It’s very easy to say that ACC should be expanded to cover illness, but it has thus far been impossible to put forward a proposal for actually doing so that gets through Parliament. So, I wasn’t especially impressed when Iain-Lees Galloway, former ACC Minister used his valedictory to say that ACC should be expanded to illness after not doing anything about it while he might actually have been in a position to do so. There are plenty of instances of people saying we should expand ACC to illness, but the funding side is chronically underdiscussed.
Sir Geoffrey Palmer has consistently advocated for an expansion of the scheme, and made a serious attempt while Prime Minister in the 1980s. Palmer recounts that, unexpectedly, he was not able to coordinate his parliamentary colleagues and government departments to make it happen. Social Welfare raised the concern that expanding ACC to illness would open up a new unjust dividing line between people covered by the scheme and the unemployed, who can also be seen as victims of a kind of misfortune. Outside of government, the trade unions objected to proposals to reduce the entitlements payable under the scheme in order to expand it. While a Bill was introduced to Parliament, Labour lost power and National took the scheme in a very different direction in the 1990s.
So, having said that I’m not very impressed by people who say the scheme should be expanded without actually advancing the question of how to finance the expansion, I’ll now try and make a contribution in that area. I’m assuming that we’re talking about a scheme that is pretty similar in terms of the entitlements that ACC provides at the moment, but covering a wider range of impairments.
Some thoughts on funding the expansion of the scheme
Current funding
I’ll start with how the scheme is funded now. Funding varies depending on how an injury was caused. There are four main “accounts”:
· The “work account” pays for entitlements for injuries suffered at work. It is funded by levies paid by employers (including the self-employed). Levies are based on payroll, industry risk and individual employer accident record;
· The “motor vehicle” account pays for entitlements for motor vehicle injuries. It is funded by vehicle license fees and petrol levies;
· The “earners” account pays for entitlements for injuries suffered by earners that are not in one of the first two accounts (for example a sporting accident outside of work). It is funded by levies on earnings and generally comes out with tax in PAYE. The same percentage levy rate is applied for all earners;
· The “non-earners” account pays for entitlement for injuries suffered by non-earners, other than motor vehicle injures.
There is also a “treatment injury” account, which pays for entitlements for the injuries caused by treatment covered under the ACC scheme. It draws from the earners and non-earners accounts.
Broadly speaking, there are two different principled rationales for funding reflected in this picture.
The first is community responsibility – the idea that the ACC scheme represents the community taking responsibility for the less fortunate. This is reflected in funding of the non-earners account, which is funded through general taxation.
The second is personal responsibility by insurance – people should take responsibility for the risks that they create for injury to themselves and others by taking out insurance. Insurance levies are based on risk and what is payable when an insured event occurs. This is reflected in the funding of the work account (employers in riskier industries and with worse accident records pay more), the motor vehicle account (people who drive more, thus generating more risk, use more petrol and have to pay more through petrol levies) and the earners’ account (people who earn more will get paid more compensation if they are injured so have to contribute more to the earners account).
Responding to the Green Party proposal
The Green Party has boldly proposed expansion of the ACC scheme to become the “Agency for Comprehensive Care”. In a normal election year that might have been an important talking point, and it’s a shame that it hasn’t been. The Green policy is a helpful starting point in terms of discussing how we might fund expansion of the ACC scheme.
I’ll respond to three features in the Green proposal:
· Funding ACC through an “equitable mix of levies on employers, employees, motor vehicle usage and general taxation.”;
· Specific risk-based levies to encourage injury prevention; and
· Returning ACC to pay-as-you-go.
I take the first point here as suggesting retaining the account-based approach where different impairments have different funding sources depending on cause. I think that’s probably a sensible approach, rather than starting completely from scratch. To some extent, we can scale up existing funding methodology as we widen the scope of the scheme.
This works quite nicely for the work account. If you expand cover for work-related impairments that are currently not covered, for example many work-related mental injuries, you can then increase employer levies accordingly.
To an extent, the same can be said about the earners’ account – you levy people’s earnings at a greater rate, and they get cover for a wider range of impairments.
In the case of both of these accounts, the party who is being levied receives a benefit. Employers benefit from their impaired employees having access to ACC rehabilitation, which can facilitate return to work. Earners benefit from being able to access ACC entitlements when ill, and the need for private health insurance is reduced.
Scaling up the non-earners account might be more of a challenge. It is not a case of simply increasing the levy on an existing source of money. Rather, general taxation needs to provide sufficient funding for the entitlements for non-earners. That might necessitate more extensive changes to the tax system, and some money that is currently spent via the health system would be moved to the new ACC.
On the second point, I’m somewhat sceptical of injury prevention as a rationale for risk-based levies. It’s questionable how effective risk-based levies actually are at affecting behaviour. Plus, we also have WorkSafe prosecutions to act as a deterrent. However, I think that there are good reasons to set levies that reflect risk, rather than a flat levy across all injuries, which the Royal Commission recommended.
In particular, I think that, if we’re going to have no-fault scheme, then someone who engages in a profit-making enterprise that creates a risk of impairment in other people should have to contribute to the scheme in a way that reflects that risk. The work account already reflects that. But I think that there are some gaps. I’m not talking about levying local rugby clubs or anything like that.
However, if we’re talking about expanding ACC and changing the funding we need to have a serious look at businesses that generate risks of injury for their customers. Those businesses benefit from the scheme – they are protected from getting sued by their injured customers – but they do not make a corresponding contribution to the scheme. As I said after the Whakaari / White Island disaster, we should be thinking about whether there is a way to make adventure tourism operators and e-scooter providers, to give some examples, fairly contribute to the scheme that they benefit from. It might seem harsh to be talking about imposing additional levies on tourism operators in light of a drop in tourist numbers, but in my view if they’re free-riding off the ACC scheme, that’s a problem that should be addressed. If we’re expanding the scheme, that might mean looking at companies whose products generate risks of illness too: cigarette companies, and so on. Some other researchers have suggested that manufacturers of defective goods also get to free-ride on the scheme, but arguably this is a different case from say adventure tourism, because, at least we’d hope, risk of injury to customers isn’t an inherent part of their business.
The third point from the Green Party proposal I want to address is a return to pay-as-you-go funding, from the scheme’s current full-funding model. This is a different funding methodology question from what I have discussed above.
Pay-as-you-go works like it sounds – in a given year, ACC aims to take in enough money to pay for its outgoings. That is, to pay for the expenses associated with past injuries and any new ones suffered that year. Under pay-as-you-go, it is possible to maintain a reserve and the Green proposal, sensibly, suggests doing so to cover cost ‘shocks’ and smooth levy changes.
Full-funding is a little more complex. In a given year, ACC aims to take in enough money to pay for the lifetime costs of all new injuries suffered in that year. That necessitates keeping a reserve, as money is set aside in anticipation of future costs. Costs incurred in relation to injuries suffered in earlier years are paid for out of the money set aside in those years.
ACC started as fully-funded, was shifted to pay-as-you-go in 1982 and went back to full-funding again in 1999 as part of the National government introducing competition to aspects of the scheme. Labour quickly undid the competition later in 1999 but kept the scheme full-funded. The scheme has accumulated vast reserves since then, with the 2019 Annual Report listing the scheme’s investment fund at $44b.
Arguments over pay-as-you-go versus full-funding often come down to whether you see the scheme as more like a government department or an insurance company. Pay-as-you-go is the approach we typically adopt for government departments that provide social services, while the full-funding model is more like how insurance companies operate.
In March this year, not long before the government announced the lockdown regime, Chris Trotter arguedthat the PM should return the scheme to pay-as-you-go and break into the full-funding piggy bank to fund COVID-19 recovery. Trotter painted the full-funding system as a crystallisation of neoliberal orthodoxy in the ACC scheme, which Ardern had a prime opportunity to shatter.
While it is the case that the return to full-funding went hand-in-hand with the then National government’s privatisation plan for ACC, and I have no particular fondness for competitive provision of the ACC scheme, I also have deep reservations about returning the scheme to pay-as-you go. My main concern here is intergenerational fairness.
The ACC reserves are held in anticipation of future costs. The physio for the knee injury that’s going to act up again in a few years. The surgery and compensation for time off work in five years time for the shoulder dislocation suffered yesterday. The lifetime cost of care for someone who was just born with a brain injury from birth hypoxia and is able to have cover under the current rules. And so on. Shifting the scheme back to pay-as-you-go does not make these costs go away. It just shifts the responsibility for paying for them to the future.
Things are already looking pretty grim for future generations. There’s climate change, the post-COVID state of the local and world economy, the housing situation, and concerns over the future of superannuation funding. I’m worried that a return to pay-as-you go, although it may have its merits, is just pulling a classic Boomer move and making things a bit easier right now at the expense of future generations.
Retaining full-funding does not mean that things have to stay exactly the same. The Green policy is to prevent ACC from investing in enterprises that increase rates of injury or illness or otherwise have significant adverse social or environment effects. That’s certainly worth thinking about.
One other potential source of funding that could be explored is fines for workplace health and safety offences.
Final thoughts
I used to work for ACC prior to becoming a legal academic, and much of my teaching and research has been concerned with accidents and insurance. The question of expanding ACC is one which I’ve been hoping to see real movement on for some time. The incoming government, regardless of its exact form, provides an exciting possibility for real change in this area. So, I hope they take a serious look at a big expansion of ACC. Since funding of the scheme is levy-based, this can happen without introducing any new taxes.
If they do so, I have two pieces of advice. The first is to be mindful that the ACC scheme is not a thing solely of the political left in New Zealand. There’s been a long-standing political consensus over the basic reform underpinning the scheme – to replace claims for personal injury with a no-fault scheme – which endured even the neoliberal reforms of the 1980s and 1990s. The current scheme reflects a mix of community responsibility and personal responsibility thinking. For an expansion of the scheme to have similar longevity, it may also need to have broad appeal to the left and right, even if for different political reasons.
Second, don’t introduce a significant reform to ACC just before you lose an election. Had Labour not lost in 1990, Palmer might have been able get the expansion he tried to achieve over the legislative finishing line. Or, if it had been passed a few years out from the election, it may have been too difficult to dislodge the already-running new scheme. Similarly, National introduced a competitive provision of the scheme which commenced in 1999, but then they lost power to Labour in the 1999 election, who swiftly moved to remove competition. With that in mind, the clock’s ticking!